Prestige Brands’ Shares Pressure Genomma to Better Offer

March 19 (Bloomberg) -- Traders are convinced that a
takeover bid for Prestige Brands Holdings Inc., already the most
expensive on record in the household products industry, is about
to get even pricier.

Prestige closed 5.4 percent above the $16.60-a-share offer
from Genomma Lab Internacional SAB last week, the most since the
unsolicited proposal was announced Feb. 21 and the third-biggest
gap among pending deals in North America greater than $1 billion,
according to data compiled by Bloomberg. The $1.3 billion offer
values Prestige at 3.1 times sales, more than any other similar-sized takeover of a household products maker. With Prestige
shifting away from household products after recent deals, the 27
percent premium to its 20-day average is still less than the
average 37 percent in the personal care industry, the data show.

While Genomma’s chief financial officer said last week the
Mexico City-based maker of over-the-counter drugs has no plans
to raise the bid “at this moment,” Oscar Gruss & Son Inc. and
MKM Partners say Prestige is worth at least $18 a share. Genomma
wants to expand in the U.S. and bring Prestige brands from Spic
and Span cleaners to Clear Eye eyedrops to Latin America, said
Corp. Actinver SAB. Analysts already estimate that Prestige,
which bought 15 over-the-counter medicines from GlaxoSmithKline
Plc this fiscal year, will boost sales 80 percent by 2013.

“You never put your best offer out the first time,” Peter
Lobravico, New York-based vice president of merger arbitrage
trading and sales at Wall Street Access, said in a telephone
interview. “His language left the door open for a bump down the
road. Genomma does want to buy them. Prestige has some well-known name brands in their portfolio.”

‘Highly Conditional Proposal’

While Prestige’s board doesn’t have a price in mind,
Genomma is unlikely to be taken seriously if the offer remains
lower than $18 a share, according to a person familiar with the
situation, who declined to be identified because the matter is
private.

“We are not in a position to comment regarding any
possible price increases we might make in connection with our
proposal,” Ana Maria Ybarra Corcuera, a spokeswoman for Genomma,
said in an e-mail. “We are willing to meet with Prestige
management at any time to negotiate a friendly transaction.”

Robin Weinberg, a spokeswoman for Irvington, New York-based
Prestige, referred to a March 12 press release in which the
company said Genomma hadn’t negotiated with Prestige before
announcing the “highly conditional proposal.”

Comet Cleaner

“We are committed to maximizing stockholder value, and
would be open to compelling, fully financed offers that provide
certainty of closing,” Prestige Chief Executive Officer Matthew
Mannelly said in the statement. “Should Genomma Lab make such
an offer, there would be a basis to engage with them.”

Prestige Brands, which was formed when its predecessor
company purchased the Spic and Span Co. and Medtech Holdings Inc.
in 2004, makes everything from Comet bathroom tile cleaner and
Chloraseptic sore-throat sprays to Dramamine motion sickness
treatment and Compound W wart remover.

The company also agreed to buy 17 brands, including Fiber
Choice digestive supplements and Ecotrin aspirin tablets, from
London-based Glaxo for about $660 million in December. It
completed the purchase of 15 brands Jan. 31 and said it will
acquire the remaining two in the first half of this year.

In the fiscal year ended March 2011, about 30 percent of
Prestige’s revenue came from household products and 70 percent
from over-the-counter healthcare. With the purchase of Glaxo’s
brands, Prestige will get more than 85 percent of revenue from
that category, the company said in a December presentation.

Anti-Aging Shampoo

Genomma, which manufactures so-called anti-aging shampoo,
condoms and pain medicines, said last month it plans to acquire
Prestige for $16.60 a share, or $1.27 billion including net debt,
according to data compiled by Bloomberg.

The deal values Prestige at 3.1 times its $403 million in
sales in the last 12 months, the richest revenue multiple paid
for a household products company in takeovers worth at least
$500 million, data compiled by Bloomberg show. The 27 percent
premium to Prestige’s 20-day trading average prior to the bid
compares with an industry average of 24 percent, the data show.

Still, in another purchase of an over-the-counter medicine
company two years ago, Sanofi-Aventis SA bought Chattem Inc. for
$2.1 billion including net debt, valuing the maker of Gold Bond
medicated body powder at 4.6 times sales, data compiled by
Bloomberg show. The revenue multiple and the 38 percent premium
were both higher than Genomma’s offer for Prestige. Chattem was
classified as a maker of cosmetics and personal care products,
an industry which has commanded an average premium of 37 percent
for takeovers greater than $500 million, the data show.

‘At This Moment’

Prestige’s board rejected the unsolicited proposal March 12
as “inadequate and not compelling” and said the timing was
“opportunistic” in light of the recent acquisition of Glaxo’s
over-the-counter brands.

Shares of Prestige closed at $17.49 on March 16, the most
above Genomma’s proposal since the deal was announced,
indicating that merger arbitragers are betting Genomma will
increase the offer.

“At this moment the company has no intention to raise the
offer,” Genomma CFO Oscar Villalobos said in a phone interview
with Bloomberg News on March 14. He said the company is
analyzing all “alternatives” in order “to stay in the
process.”

After his comments, Prestige shares climbed to an almost
seven-year high as some traders interpreted the statement as a
sign the company may be open to boosting the bid at a later date,
said Keith Moore, an event-driven strategist at MKM Partners.

‘Negotiating Ploy’

“It’s sort of a negotiating ploy to say ‘We have no
current plans to raise the bid,’” Moore said in a phone
interview from Stamford, Connecticut. “If they said they’re
planning on raising the bid, Prestige’s stock would go up even
further.”

Still, the CFO’s remarks also led to a two-day gain of 5.4
percent for Genomma’s stock, indicating some Genomma investors
were less concerned about the company raising its bid. Ed Kuczma,
who helps manage $35 billion including Genomma shares at Van Eck
Associates in New York, said traders have overreacted by pushing
up Prestige’s stock price.

“I know that Prestige management initially turned it down,
but I think it’s a great price and value for Prestige’s
shareholders,” Kuczma said in a phone interview. “I’ve had
discussions with the CFO off and on, and he’s been pretty firm
that they think that they’ve offered a fair price. I’m confident
that that’s the price where the deal will get done.”

Advertising in Mexico

Genomma notified Prestige after the market closed on March
15 that it plans to nominate five independent candidates for the
company’s board, sparking a 3.5 percent decline for Genomma
shares the next day. Prestige said the move is intended to
advance Genomma’s proposal to acquire Prestige at “the lowest
possible price.”

“If you see them nominate directors and then they follow
up with a bump, that’s a one-two sign that these guys really are
committed,” Louis Meyer, a New York-based special-situations
analyst at Oscar Gruss, said in a phone interview before Genomma
announced it was nominating directors. “People would like to
see the board nominees just as a sign of commitment to their
wanting to acquire the company.”

Genomma has expanded revenue in Mexico by acquiring
established brands and using its in-house marketing team to
increase name recognition. The company reaches viewers across
the country through an agreement with Grupo Televisa SAB, the
world’s largest Spanish-language broadcaster.

Marketing Strategy

Its advertising will help boost demand for Prestige’s
products such as digestive helper Beano and PediaCare children’s
medicines, Genomma said in a March 12 presentation. The company,
which gets 23 percent of sales outside of Mexico from countries
such as Brazil, Argentina and Colombia, also plans to introduce
Prestige products to its Latin American customers.

“With their advertising strategy, you have a very
interesting market in Mexico” for Prestige’s brands, Karla
Beatriz Pena, a Mexico City-based analyst at Actinver, said in a
phone interview. “Despite the fact that there’s more
competition, they believe that with their marketing expertise
they can increase market share for the Prestige brands in the
U.S.”

Genomma would be getting a company that’s already projected
to boost net income 48 percent in the year ending March 31 to a
record $43.3 million before increasing 40 percent in fiscal 2013,
analysts’ estimates compiled by Bloomberg show. Revenue will
also reach a record $434 million in 2012 and jump 40 percent to
$606 million next year, the data show.

‘I’m Convinced’

Meyer of Oscar Gruss estimates Prestige is worth $18 to $20
a share in a takeover because Genomma can cut costs and increase
revenue by selling its products across the border. MKM Partners’
Moore said a boost of at least 8.4 percent to $18 a share would
be fair. A price tag of $18 would also be 33 percent more than
Prestige’s closing price before any offer was disclosed.

“I’m convinced that Genomma does want to buy them and
clearly the market agrees with me because otherwise Prestige
would be trading at a discount” to the bid, said Lobravico of
Wall Street Access. “It’s reasonable to assume that at some
point you could get a bump.”